Private equity: What’s the difference between primaries and secondaries - and why it matters

David Chan, Portfolio Manager – MLC Private Equity
Alicia Chen, Assistant Portfolio Manager – MLC Private Equity

Private equity (PE) means investing in companies that aren’t listed on the stock market. There are two main ways to do this: primaries and secondaries. We mostly prefer primaries, but both have their place. Here’s a simple explanation of the differences and why we lean one way.

What’s the difference?

• Primary investments You commit money to a new private equity fund when it’s first being raised. The fund manager then uses that money to find and buy companies, improve them, and ideally, later sell them for a profit. You don’t know exactly which companies you’ll end up owning at the start.
• Secondary investments You buy an existing stake in an older private equity fund from another investor who wants to sell. The fund has already invested in companies, so you can see what you’re getting and how those companies are performing.

Why some people like secondaries

• Less “blind” risk – you can see the companies and their track record before investing.
• Potentially quicker returns – the fund is already part-way through its life, so sales (and profits) may happen sooner.
• Shorter wait for money back – it can help avoid the slow early years (called the “J-curve”) that new funds often have.

Secondaries have become popular, and a lot of money has flowed into them recently.

Why we generally prefer primaries

1. More room for growth. In our experience, the biggest improvements in a company usually happen in the first few years after a private equity manager buys it – new leadership, fixing inefficiencies, smart growth plans. With primaries, you’re in from the beginning and capture much of that upside. In secondaries, much of that work may already be done, leaving less potential gain for the new owner.
2. Better long-term returns historically Over many years, primary buyout funds have delivered stronger returns than secondary funds, especially in recent times.¹ 
3. Entry price matters Secondary buyers often used to get a good discount, making the deal attractive. But competition has driven prices up, so those discounts have shrunk a lot since 2022.² Paying close to full value leaves less margin for strong returns.
4. The real value comes from active management Skilled private equity managers create value by actively improving companies – growing earnings, making smart add-on buys, and preparing businesses for a profitable sale. Starting at the beginning gives you the full benefit of this process.

Our experience

We’ve been investing in private equity since 1997, mostly through primaries and direct co-investments alongside top managers. In our own deals, we’ve seen around 89% of the total value created in the first three years of ownership. The main driver has been growing company earnings, not just financial tricks like borrowing more.

Choosing the right managers is crucial in private equity – the difference between the best and the rest is huge, much bigger than in shares. Long-term relationships with proven managers give us access to the best opportunities.

Where secondaries fit

Secondaries can still be useful – for example, to add variety to a portfolio, manage liquidity, or keep hold of good assets longer. But we see them as a supporting role rather than the main event.

A quick word on risk

Private equity is long-term and illiquid – your money is usually tied up for many years, and returns aren’t guaranteed. Values can go up or down and are more difficult to value than listed equity so careful selection of managers and strategies is essential.

In summary, while secondaries have appealing features, we believe primary investments generally offer better potential for strong, long-term returns because you capture the full value-creation journey from the start. For most investors, a portfolio focused on high-quality primaries makes the most sense.